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ARIZONA STATE SENATE
Fifty-Fifth Legislature, Second Regular Session
TPT; prime contracting; exemption; alterations
Purpose
Effective January 1, 2023, modifies the definitions of alteration and modification for the purposes of the prime contracting classification and removes the residential contract value cap of 25 percent of the most recent full cash value (FCV) of the property from the criteria for a project to qualify as an alteration.
Background
Transaction privilege tax (TPT) is imposed on the gross receipts of taxable businesses, with the exception of prime contractors. The tax base for the prime contracting classification is 65 percent of the gross proceeds of sales or gross income derived from the business and certain amounts must be deducted before computing the tax base. A prime contractor is not subject to TPT on the gross proceeds of sales or gross income derived from a contract with an owner of real property for the maintenance, repair, replacement or alteration of real property if such contracts do not include modification activity. Modification is construction, grading and leveling ground, wreckage or demolition
Alteration is an activity or action that causes a direct physical change to existing property and does not include maintenance, repair or replacement. For a residential project contract to qualify as an alteration, the contract amount may not exceed 25 percent of the most recent FCV of the property as of the date of any bid for the work or the date of the contract, whichever value is higher. If a project, at the inception of the contract, would be treated as an alteration based on the project cost and, on completion of the project, the project exceeded the statutory contract cost cap by up to 25 percent of the cap, the work performed under the contract qualifies as an alteration. Project elements may not be artificially separated from a contract to cause a project to qualify as an alteration and the Arizona Department of Revenue (ADOR) has the burden of proving that project elements have been artificially separated (A.R.S. § 42-5075).
The Joint Legislative Budget Committee (JLBC) fiscal note states that due to a lack of detailed contracting data, JLBC is not able to determine the fiscal impact of H.B. 2749. The fiscal note contains example scenarios but JLBC cannot determine in advance whether the aggregate net impact to the state General Fund would be positive or negative (JLBC fiscal note).
Provisions
1. Adds, to the definition of alteration, the criteria that the activity or action does not increase the square footage of the existing residential property.
2. Removes, from the criteria for a project to qualify as an alteration, the residential contract value cap of 25 percent of the most recent FCV.
3. Includes, in the definition of modification, other activities or actions that increase the square footage of an existing property.
4. Removes the stipulation that a contract qualifies as an alteration if, on completion of the project, the project exceeds the contract cost by 25 percent of the statutory contract cost cap.
5. Removes the prohibition on project elements being artificially separated from a contract to cause a project to qualify as an alteration and removes ADOR's burden of proving the separation.
6. Removes the requirement that a change order that directly relates to the scope of work of the original alteration contract be treated as part of the original contract and that the contract amount include any amount attributable to the change order.
7. Applies the modified definitions of alteration and modification to contracts, bids or other binding obligations entered into beginning January 1, 2023.
8. Makes technical changes.
9. Becomes effective January 1, 2023.
House Action
WM 2/16/22 DP 7-2-1-0
3rd Read 2/24/22 42-17-1
Prepared by Senate Research
March 25, 2022
MG/slp